Find out why this oft-overlooked tech stock is a smart buy, despite its recent financial woes. Spoiler alert: Modern AI systems require lots of this company's products.
At first glance, Micron Technology (MU 2.81%) might not seem like a solid stock to buy today.
The company, which designs and makes computer memory chips, hasn't been profitable on a trailing-12-month basis. That's also true for Micron's free cash flow, which has been negative for the past four quarters. Trailing-12-month sales are down 34% from their all-time high in the summer of 2022.
Investors don't seem too excited about the financials, either. Micron's shares are down 39% from an all-time high hit two months ago. The company's stock chart has looked like a hyper-volatile version of a tech-sector tracker like Invesco QQQ Trust (QQQ, 1.35%) over the past five months, and that's not meant as a compliment.
MU data by YCharts.
However, I am recommending Micron as a great buy in August 2024. The company is not profitable, sales are declining, and the stock price is plummeting. How does this confluence of bearish signs translate into a “buy” signal?
There's more to the Micron story. Let us show you.
Micron's Recent Struggles
Micron's sales and profits have certainly been very depressed recently: Starting in the third quarter of 2022, revenues fell by more than 27% over the next five quarters. Adjusted earnings per share fell to negative $6.05, and annual cash flow came in at $6.1 billion.
Ouch. And this is at a major hardware provider in the middle of an artificial intelligence (AI) market explosion?
While this will be hard to stomach for some investors, I think it would be a big mistake to stop your analysis of Micron there.
Why Micron Matters in the Golden Age of AI
As you know, Micron is firmly committed to the AI opportunity. Computer systems built for training advanced AI software require lots of memory. Once training is complete, systems that deliver consumer (or enterprise-ready) AI services also require lots of memory.
You know what a smartphone needs to offer AI services without a cloud computing hub? Yes, plenty of memory! For example, the base model of Alphabet's (GOOG 1.21%) (GOOGL 1.19%) Pixel 9 smartphone comes with several AI features, including the Gemini voice assistant and photo finishing tools.
It also has 12GB of RAM, up from 8GB in last year's less AI-equipped Pixel 8. That's an above-average memory increase, as the Pixel 8 had the same memory configuration as the previous Pixel 5, which Alphabet released in the fall of 2020.
The latest wave of AI-enabled flagship phones is expected to spur mass upgrades from older non-AI phones. The combination of increased phone sales and more memory per phone should boost Micron's revenues significantly, but this is only the smartphone part of the AI puzzle.
The positive trends are piling up!
The AI-enabled surge has already begun.
Micron's third-quarter revenue increased 82% year over year, and analysts on average expect fourth-quarter revenue to increase even more. Both adjusted and raw earnings have been positive for the past two quarters and are expected to continue to grow in the near term. Free cash flow also rose into positive territory last quarter. Although analysts rarely provide forecasts for this metric, Micron's cash flow should increase as long as earnings are growing.
Micron operates in a highly cyclical industry and it is time for another upswing. My only recommendation for market timing is to keep an eye on good companies with low share prices, and today Micron is that company. The stock is trading at a cheap price of 9.8 times forward earnings, based on consensus estimates from groups that tend to price Micron's earnings too low.
As the AI boom continues, Micron is expected to perform well, and its shares are on fire today. You should consider buying this high-quality semiconductor stock on the cheap.
Suzanne Frey, an Alphabet executive, serves on The Motley Fool's board of directors. Anders Bylund has invested in Alphabet and Micron Technology. The Motley Fool invests in and recommends Alphabet. The Motley Fool has a disclosure policy.
